Guizhou Gas Group (SHSE:600903) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Guizhou Gas Group (SHSE:600903) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guizhou Gas Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.043 = CN¥324m ÷ (CN¥11b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

Thus, Guizhou Gas Group has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 10.0%.

See our latest analysis for Guizhou Gas Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guizhou Gas Group's ROCE against it's prior returns. If you'd like to look at how Guizhou Gas Group has performed in the past in other metrics, you can view this free graph of Guizhou Gas Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guizhou Gas Group Tell Us?

On the surface, the trend of ROCE at Guizhou Gas Group doesn't inspire confidence. To be more specific, ROCE has fallen from 7.7% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Guizhou Gas Group has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Guizhou Gas Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 53% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Guizhou Gas Group, we've spotted 3 warning signs, and 2 of them are a bit concerning.

While Guizhou Gas Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.